Labour unveils 'tool' to drop dollar

However, employers have backed the plan, saying it "has
merit" and warrants "careful consideration".

Labour finance spokesman David Parker announced this morning
that a Labour-led government will require the Reserve Bank to
use changes to the rate of people's compulsory KiwiSaver
contributions rather than interest rates to control inflation
while taking pressure off the over-valued kiwi dollar.

Mr English said the variable savings rate idea was "nothing
new".

"You can increase the KiwiSaver contribution rate and we did
just 12 months ago. If you want to dampen consumption you can
also put up tax rates or the Government can spend less."

Mr English said Labour and the Greens were fighting the
perception that in Government they would tax and spend more
which would push up interest rates.

"So they've floated something they might investigate which
they say would fix everything but the end result is you have
to save more. It will hit low and middle income households
particularly hard. He's not committing the Government to
saving more and it would allow a Labour Greens Government to
spend a lot more if it worked."

However he was sceptical it would work.

"KiwiSaver is a long term scheme where people need as much
certainty and security as you can get... monetary policy
focuses on the price of credit. They are both designed for
their own specific purpose both have been successful. They
both create challenges but there's no evidence that mixing
the two of them up is going to somehow give us a magic
pudding we've never seen before."

Plan has merit - employers

However the Employers and Manufacturers Assocation said
Labour's proposals "have merit and warrant careful
consideration, particularly as the Reserve Bank's
independence would be preserved".

"What's more, New Zealanders would keep their added savings
rather than see them disappear when interest rates rise. It
could work out well in the longer term."

But while the variable savings rate was a good idea, "it
would not be a good idea to allow politicians to determine
what it should be".

Furthermore, Mr Campbell said the proposal rested on
KiwiSaver being made compulsory, "an idea whose costs may
fall unfairly on small businesses".

Labour unveils Kiwisaver plan

Parker unveiled the policy at an Auckland breakfast briefing
this morning.

"Instead of paying more interest on your mortgage, under the
new rules a similar amount of extra savings would go into
your KiwiSaver," he said.

"Overall interest rates will be lower and so will our
exchange rate" through use of the Variable Savings Rate(VSR),
which a policy paper published this morning says will be
"investigated" and from which low income earners may be
exempted.

"The policy targets agreement will request that the Reserve
Bank use this once in a lifetime opportunity to attempt to
get underlying (as opposed to cyclical) New Zealand interest
rates back to the lower levels charged in our competitor
countries," said Parker.

"The PTA would state whether or not it was the government's
expectation that over the economic cycle the Reserve Bank
variations to the KiwiSaver rate would be neutral."

Labour would also shift the RBNZ's inflation targeting to
include achieving current account surpluses to reverse 40
years of the country living beyond its means.

"If New Zealand is to decrease its net international
liabilities and do better in growing per capita incomes
(particularly for low and middle deciles), greater priority
will need to be given to achieving growth in its foreign
exchange earnings or saving sectors."

Parker said "nowhere currently" used a VSR system, but that
moving all New Zealanders into compulsory KiwiSaver at an
increased rate of contribution would reduce inflationary
pressure during the transition phase anyway.

"This is the perfect time to do this," he said.

Labour would raise the current 6 per cent contribution rate
to 9 per cent (paid 50/50 by employee and employer) over
time. The rates at which a VSR might be set are not
discussed, although limits to the extent of variation in
savings rates might be part of the PTA.

The RBNZ would not have the ability to deploy the VSR
unilaterally. It would have to recommend its use to the
government and require agreement on a case by case basis.

"Higher interest rate payments are lost to the lender, with
much of it heading overseas, whereas savings would belong to
the saver," Parker said.

To reflect a new emphasis on improving the country's external
accounts, the Reserve Bank Act would be amended to "maintain
stability in the general level of prices in a manner which
best assists in achieving a positive external balance over
the economic cycle."

David Parker's little trick was to tell us that interest paid
to banks is kept by banks. The average Labour voter and the
average journalist seem to believe this and don't understand
that most of the interest that banks collect from borrowers
gets paid to the lenders. The banks keep only a small
portion, and many New Zealand lenders depend on the interest
on their deposits to survive financially.

Both the compulsory KiwiSaver and the Variable Savings Rate
(VSR) would be bad for the poor. Many already struggle to pay
their rent or mortgage and would be hit hard by having 9% of
their income removed. Many would like to save for their
retirement, but can't afford to. The VSR seems very
unpleasant for all those households that need to plan their
finances: the VSR could be changed several times a year, at
the whim of a bunch of politicians. This means that, at times
and without warning, everyone will be forced to increase
their KiwiSaver contribution and will suffer an unexpected
decrease in income. The benefits of this seem negligible, but
the detrimental effects on the poor seem significant.

Skinhat: listening to the radio today I think that for most
workers it would be a wash - after all the money they'd be
forced to put into kiwisaver would still be theirs, and their
employer would also be putting in more. The alternative is
that interest rates go up and as a result mortgages and rent
go up. They end up with less in their hands once their bills
are paid either way - and if the interest rates go up the
money gets shifted to Aussie banks who move it out of the
country. I think it's better for us to keep that capital in
NZ invested in NZ companies and creating jobs here rather
than being used to prop up the standard of living of Aussie
retirees.

On the other hand, I think that employers would be the
ones who lose out the most, and as we see above they
see there is largely an upside for them.

Doesn't seem fair that workers bear the burden of containing
inflation since basically Labour wants to reduce workers' pay
(money would go to Kiwisaver instead) to reduce spending and
possibly reduce inflation and therefore reduce the NZ dollar.
With higher interest rates, at least businesses also bear the
burden of containing inflation since they will have to spend
more on interest.

Businesses contribute a lot to inflation (eg the Christchurch
build), so just taking away pay from workers may not have a
big impact on inflation. Having a high NZ dollar does give
more parity with Australian pay so may reduce the number of
New Zealanders leaving New Zealand. Also businesses that use
a lot of imports will pay less. A high NZ dollar has its
positives and negatives.

The article also mentions that Labour is unhappy that
interest is lost to the lender. Is this bad? If you put your
money in the bank, getting interest on your money is good for
the saver. Currently with interest rates so low you might as
well put your savings under a mattress.

Also, I think workers will feel uneasy that their take home
pay will vary a lot depending on inflation. The article
doesnt mention any threshold of how much pay Labour would be
prepared to take out. Would they be prepared to take out
20%?

There is only one way Kiwisaver contributions would be
variable under Parker's scheme. Upwards, and that's harsh on
those who have no mortgage or have paid their mortgage
off. Less disposable income and higher prices of nearly
everything because of a lowered exchange rate is hardly
going to help the average earner. And how high would
contributions have to be set befgore the economy cooled
enough to allow interest rates to be retained at current
levels? Certainly more than the equivalent percentage
interest rates need to rise, because businesses pay interest
but do not pay into kiwisaver, if in fact interest could be
contained. This proposal is fraught with unknown and
unintended consequences. Nothing wrong with a compulsory
savings scheme, but the rate needs to be fixed and not linked
to the OCR.

As an exporter anything that deals with the exchange rate
misery that our wold-leading interest rates cause is a good
thing. This one has the double whammy of freeing more money
to be invested in local business, something that will pay off
for all of us in the long term.

The one downside I see is that I don't think this is a knob
that can be turned quickly to tweak the economy, it's more of
a long term thing because it will take months for a change to
be implemented in employer's payroll systems - like a change
in the income tax rates, it would likely require at least 2
month's notice and take a month or two longer for the
economic effects to actually kick in. I'd expect the Reserve
Bank to continue to use monthly interest rate tweaks, but
over time to trade off long term bulk rises into kiwisaver to
ameliorate the downsides of the current economic tweaking.